By Chloe Exposes the Struggle Between Bankruptcy and Intellectual Property Rights
Chloe Coscarelli became a prominent vegan chef after appearing on Food Network’s Cupcake Wars and in 2015 launched her namesake restaurant chain (“by Chloe”) with ESquared Hospitality LLC (“ESquared”).[1] However, in 2017, the parties’ relationship started to deteriorate with an arbitrator ruling that Coscarelli misappropriated intellectual property.[2] As a result, Coscarelli no longer had a membership in by Chloe, and ESquared quickly purchased her stake in the company.[3] In 2018, Coscarelli launched a lawsuit against the company for trademark infringement and a claim that the transfer to ESquared was a breach of their operating agreement.[4] However, in December 2020, the chain’s parent company, BC Hospitality Group Inc. (“BC Hospitality”), filed for Chapter 11 bankruptcy after shutting many of its doors due to the COVID-19 pandemic.[5] Though the bankruptcy potentially complicated the matter, in January 2021 a Manhattan federal judge ruled that ESquared was liable for the breach, but postponed judgement regarding BC Hospitality pending the bankruptcy case.[6] Though this judgment came after an arbitrator reinstated Coscarelli’s fifty percent membership interest in the company, the relationship between intellectual property rights and bankruptcy remains complex.[7]
Last year, some of the most popular brands have turned to bankruptcy. For example, Brooks Brothers, Neiman Marcus, Ascena Retail Group—which owns Ann Taylor, Justice, and Lane Bryant—and Arcadia Group—which owns TopShop—found themselves filing for bankruptcy relief.[8] So far this year, companies such as L’Occitane and Belk have also filed for bankruptcy.[9] However, intellectual property, such as trademarks, copyrights, and patents, is still a hot commodity. In fact, intellectual property assets have drawn more attention in recent years due to the increase in online shopping.[10] For example, a bankruptcy court judge approved a $271 million bid for Barneys’ intellectual property in October 2019.[11] During the summer of 2020, Pier 1 Imports had a potential buyer offer more than $20 million for their intellectual property and e-commerce business.[12] Investors see lucrative opportunities in buying intellectual property and watch bankruptcy filings for valuable intellectual property assets.[13] Thus, there are bound to be problems arising between intellectual property and bankruptcy.
Chapter 11 bankruptcy aims to help the debtor’s survival, and while this may often mean a corporate reorganization plan, debtors can also liquidate their assets, such as intellectual property.[14] When acquiring intellectual property from a company that has filed for bankruptcy, a purchaser must know whether the intellectual property is owned or licensed by a debtor.[15] If licensed, then the purchaser must know whether the license is exclusive or nonexclusive.[16] Exclusive licenses are only granted to one licensee, while non-exclusive licenses may be granted to multiple licensees.[17] However, before a court allows a debtor to make a decision on an intellectual property agreement, the court must determine whether the agreement is executory—executory contracts being those “under which the corporation and the counter-party still have material obligations to each other.”[18] However, intellectual property owners—especially those whose intellectual property uses their name—can experience struggles with agreements even without bankruptcy proceedings.
Hayley Paige Gutman, a prominent wedding dress designer, resigned from JLM Couture, which owns Hayley Paige brands, after a lengthy legal battle to negotiate a new contract.[19] In late 2020, JLM filed a suit against her raising multiple claims including breach of contract and trademark dilution.[20] The complaint alleged that Gutman granted JLM the “exclusive world-wide right and license to use her name . . . in connection with the design, manufacture, marketing and/or sale of bridal clothing, bridal accessories and related bridal and wedding items.”[21] The complaint also alleged that Gutman “irrevocably sold, assigned, and transferred all right, title, and interest to JLM” to register the Hayley Paige name or any derivative as a trademark in the United States or abroad.[22] As a result, Gutman has refrained from posting on social media until the dispute is settled in court.[23]
In the by Chloe debacle, Coscarelli’s judgment has not significantly affected the bankruptcy proceedings as a judge ruled he could not reinstate Coscarelli’s ownership interest.[24] Nevertheless, by Chloe’s intellectual property is at stake. In February 2021, BC Hospitality selected a group of investors, such as Bain Capital LP and Kitchen Fund LP to be among the first bidders of the vegan restaurant chain.[25] This auction is currently scheduled for March 1, 2021 and a hearing for court approval of the winning bidder on March 4, 2021.[26] However, a hearing on February 25, 2021 could determine what intellectual property assets BC Hospitality has the right to transfer or sell during the bankruptcy proceedings.[27] As such, the fate of Coscarelli’s stake in by Chloe’s intellectual property is uncertain, exposing the struggle between bankruptcy and intellectual property rights.
Because intellectual property has a growing importance in bankruptcy proceedings,[28] other cases similar to the by Chloe dispute could arise. If BC Hospitality does not have the right to transfer or sell by Chloe’s intellectual property assets, such judgment could be favorable for Coscarelli. However, the matter could be even more complicated if Coscarelli is regarded as a licensor or a licensee. Regardless, potential licensors and licensees of intellectual property should be wary of these concerns before assigning or transferring their intellectual property, as well as creating partnerships with other companies. Given the possibility of bankruptcy and how lucrative buying valuable intellectual property can be, other individuals could find themselves in the same struggle wondering whose name does it belong to anyway.
Footnotes
